Don’t Let “Negativity Bias” Damage Your Portfolio

We’re a nation of “Debbie Downers.” Polls show that Americans harbor many pessimistic beliefs that are simply not true.

Most Americans believe we’re in a sharp recession. Fact: The U.S. economy has been resilient so far this year. For the third quarter, the Atlanta Fed projects year-over-year gross domestic product (GDP) growth of 4.9%.

Most Americans think inflation is raging out of control. Fact: The consumer price index (CPI) for August came in at 3.7% year-over-year, down from a peak of 9.1% in June 2022. From 1960 to 2022, the average annual CPI inflation rate was 3.8%.

It’s not just the economy. Unwarranted pessimism reigns supreme in many other areas. For example, most Americans think the crime rate has been soaring nationwide. Fact: Since the 1990s, crime rates in the U.S. have plummeted. The majority of the country perceives New York City as a violent, crime-infested hellhole, when it’s actually one of the safest cities in the world. I could go on.

Why the gloominess? I mostly blame the media and partisan political rhetoric. It’s also the human brain’s natural tendency to embrace negativity, as a survival instinct. But as an investor, if you get too defensive right now, you’ll leave money on the table.

Here are key facts you should know: Inflation is falling, the economy is expanding, and corporate earnings are on the upswing, all of which creates a long-term bullish scenario.

Today, let’s focus on earnings. After all, stock prices are based on the expectations that prospective investors have for the company’s future earnings power.

The first half of the year saw two consecutive quarters of earnings declines for the S&P 500. But now, corporate earnings are finally returning to the black.

For the third quarter of 2023, the estimated year-over-year earnings growth rate for the S&P 500 is 0.5%, according to FactSet. If 0.5% turns out to be the actual growth rate for the quarter, it will mark the first quarter of year-over-year earnings growth reported by the index since Q3 2022.

Analysts have increased earnings estimates in aggregate for the first time in nearly two years. On June 30, estimated year-over-year earnings growth for Q3 was flat at 0.0%, but Wall Street has gotten increasingly optimistic. Five sectors are projected to report higher earnings today, compared to June 30, because of upward revisions to earnings estimates.

The AI tailwind…

One of the strongest tailwinds for the stock market is the buzz over artificial intelligence (AI). We witnessed the highest number of S&P 500 companies citing the term “AI” on Q2 earnings calls in more than 10 years.

FactSet searched for the term AI in the conference call transcripts of all the S&P 500 companies that conducted earnings conference calls from June 15 through September 7. Among these companies, 177 cited AI during their earnings call. This number is well above the five-year average of 60 and the 10-year average of 37.

At the sector level, information technology posted the highest number (56) and percentage (88%) of S&P 500 companies citing AI — no surprise there.

It’s worth noting that S&P 500 companies that cited AI on Q2 earnings calls have enjoyed a better average stock price performance in recent months compared to S&P 500 companies that did not cite AI on calls.

For S&P 500 companies that cited AI on Q2 earnings calls, the average change in share price since June 30 is -0.8% and the average change in price since December 31 is 13.3%. For S&P 500 companies that did not cite AI on Q2 earnings calls, the average change in price since June 30 is -2.3% and the average change in price since December 31 is 1.5%.

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Analysts have been pleasantly surprised by the economy’s resiliency so far in 2023. Recent data showed that U.S. productivity climbed by 3.5% in the second quarter, the strongest since 2020.

If you strip out the anomalies of the COVID-induced economic contraction, Q2 experienced the highest productivity increase since the third quarter of 2017. If this trend persists, the economy should withstand higher interest rates.

That said, the main U.S. stock market indices closed lower Friday, as follows:

  • DJIA: -0.83%
  • S&P 500: -1.22%
  • NASDAQ: -1.56%
  • Russell 2000: -1.05%

The Dow closed higher for the week; the other three indices posted weekly losses. September is historically a down month. Investors also are skittish about next week’s Federal Reserve meeting, even though the betting is that the central bank will stand pat on rates.

In the meantime, consider the advice of my colleague, Robert Rapier. In up or down markets, Robert makes money for his followers.

As chief investment strategist of Income Forecaster, Robert’s unconventional investment methods could hand you the retirement of your dreams. His time-proven advice provides an investment trifecta: income, growth and safety. Click here for details.

John Persinos is the editorial director of Investing Daily.

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